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Cloudflare Files S-1 With Healthy Mix Of Accelerating Revenue Growth, Slimming Cash Burn

Today, Cloudflare, an Internet security and content delivery company, filed its S-1 as expected. The company joins WeWork in a dash to become public companies while the global equity markets are still richly-valued.

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The company’s S-1 filing details a healthy company, with revenue growing from $87.1 million in the first half of 2018 to $129.2 million in the first half of 2019. That growth, combined with a net loss that scooted up a slim $4 million. The company’s net loss rose from $32.5 million in the first half of 2018 to $36.8 million in the corresponding period this year, making Cloudflare a company that we can both understand and explain.

That’s a welcome respite after trying to untangle Uber’s numbers and WeWork’s filing. Let’s begin with some history, and then talk numbers.

History, And In-Practice

According to Crunchbase, San Francisco-based Cloudflare has raised $332.1 million in known capital since it was founded in 2009. Its last known financing was a $150 million Series E that was announced in March at a pre-money valuation of $3.1 billion. Franklin Templeton Investments led that round.

Other known investors who would benefit from a successful public exit include New Enterprise Associates (NEA) and Union Square Ventures, among others. We originally reported on the possibility of Cloudflare going public on July 31 and at the time, wrote that it intended to float this September, according to Business Insider.

Back then, we detailed Cloudfare’s business for you all:

Cloudflare is best known for its CDN, or content delivery network; the company’s services help speed Internet content to consumers around the world, helping the patchwork quilt that we call the web function with minimal delays.

Cloudflare’s business is part of the furniture to a degree. It’s also something critically important to how well online video works, for example. Which makes its debut interesting and somewhat exciting. Here’s part of the Internet’s backbone, going public.”

Got all that? Let’s get into the money.

The Numbers

As noted before, the company’s H1 2019 revenue grew from $87.1 million in the year-ago period to $129.2 million. That’s growth of 48.3 percent, year over year. That pace of growth compares favorably to the company’s full-year 2018 performance, when its revenue grew from $134.9 million to $192.7 million, a gain of 42.8 percent.

Cloudflare’s accelerating growth rate is heartening for the firm, but it does come at the cost of slightly worse profitability in gross terms. The firm’s net loss grew from $32.5 million in H1 2018 to $36.8 million in the first two quarters of 2019. While its net loss did widen, the firm’s operating cash burn fell during the two periods from $17.1 million to $12.6 million, another sign of health.

The company is, therefore, managing toothsome growth with net losses that are shrinking in percent-of-revenue terms, while it consumes less cash. Its investors must find that particular cocktail encouraging.

And Cloudflare doesn’t have to go public. With over $124 million in cash on hand at the end of Q2 2019. So, it can afford to self-fund for years. But, with the public markets until recently at record highs, it isn’t a huge surprise that the company wants to go public now. Why not get out while the getting is still good?

A final note for fans of recurring revenue. According to Cloudflare, its “dollar-based net retention rate” bounces between 110 percent and 115 percent, depending on the quarter. Built-in growth of that sort is key to a modern software services company’s ability to expand while keeping a lid on costs.1

Nuts, Bolts

According to its S-1, Cloudflare plans to list its shares on the New York Stock Exchange under the symbol “NET.” Underwriters include Goldman Sachs, Morgan Stanley, Wells Fargo Securities, RBC Capital Markets and JMP Securities, among others.

The company’s S-1 has a placeholder $100 million figure in place regarding the size of the deal. Expect more on that front when we get the company’s initial pricing interval.

Illustration: Li-Anne Dias.

  1. Here’s how Cloudflare calculates the metric: “To calculate dollar-based net retention for a period, we compare the Annualized Billings from paid customers 12 months prior to the Annualized Billings from the same set of customers in the last month of the current period. Our dollar-based net retention includes any expansion and is net of contraction and attrition, but excludes Annualized Billings from new customers in the current period. Our dollar-based net retention excludes the benefit of free customers which upgrade to a paid subscription between the prior and current periods, even though this is an important source of incremental growth.”

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